The UK’s Financial Conduct Authority (FCA) has put out a consultation paper aimed at strengthening the financial promotion rules for high risk investments, including crypto-assets (available here).
A key part of the strategy, according to the FCA, is addressing the harm from consumers investing in high-risk investments that do not match their risk tolerance. This, it suggests, can lead to unexpected and significant losses for consumers and undermine wider confidence in investments, making it harder for all firms to raise capital.
“We do not want to unnecessarily restrict consumers who want to invest, but we want them to be able to access and identify investments that suit their circumstances and attitude to risk,” the regulator says, adding:
“Since the start of the COVID-19 pandemic, we have seen a rapid growth in the proportion of consumers holding high-risk investments. Our consumer research suggests many of these new investors are driven by social and emotional factors. They do not always fully understand the risks involved, making them particularly vulnerable to unexpected losses.”
“One of the main ways consumers build their understanding of the risks and regulatory protection for investments is through the information they get in financial promotions. For high-risk investments, even a good financial promotion may not be enough to adequately protect consumers. It may meet our requirements to be clear, fair and not misleading, but a consumer may still not understand when the underlying investment does not meet their needs. In these cases, we can use our financial promotion rules to give consumers further protections.”
The FCA said it is publishing this CP now to ensure its financial promotion regime is robust and remains fit for purpose, noting that the investment environment has changed, with promotions distributed to a mass audience at increasing speed via online platforms and through social media.
Commenting on the peoposals, Nathan Long, senior analyst at Hargreaves Lansdown said:
“High risk investing has been booming of late with crypto-assets in particular proving to be the flavour of the month. There’s nothing necessarily wrong with high risk investments, but those choosing them should ensure they understand the risks involved. Having sufficient time to invest, enough cash set aside for a rainy day and ensuring the high risk investments are a sensibly sized part of their long-term portfolio are all important considerations.”
He added that the consultation from the FCA addresses many of the key issues and impressively harnesses behavioural insights to improve risk disclosure:
“Crypto-assets are included because of the expectation that they will shortly fall under the FCA’s watch when it comes to their promotion. There are still anomalies, for example it looks to be easier to have a speculative punt on a cryptocurrency than it is to add small allocations to long term infrastructure investment in a pension. However, assuming these proposals come to fruition it looks likely to improve decision making and shift investing behaviour so that high risk investments largely remain small constituents of investor’s portfolios.”